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BioScrip (NASDAQ:BIOS)

Q4 2010 Earnings Call

March 11, 2011 8:30 am ET

Executives

Mary Graves - Interim Chief Financial Officer and Treasurer

Richard Smith - Chief Executive Officer, President, Chief Operating Officer and Director

Lisa Wilson - In-Site Communications, IR

Analysts

Glenn Garmont - ThinkEquity LLC

Wayne Anglace

Michael Petusky - Noble Financial Group, Inc.

Brooks O'Neil - Dougherty & Company LLC

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the BioScrip 2010 (sic) [2011] Fourth Quarter and Year End Conference Call. [Operator Instructions] It is now my pleasure to turn the conference over to Ms. Lisa Wilson, Investor Relations for BioScrip. Please go ahead.

Lisa Wilson

Good morning, and thank you for joining us today for our 2010 fourth quarter and year end results conference call. By now you should have received a copy of our press release issued this morning. If you have not received it, you may access it through the Investor Relations section at our website. Rick Smith, President and Chief Executive Officer; and MJ Graves, interim Chief Financial Officer, will host this morning's call.

The call may be accessed through our website at bioscrip.com. A replay will be available shortly after the call. Interested parties can access the replay by dialing (800)633-8284 in the U.S. and (402)977-9140 internationally, and entering access code 21511570. An audio webcast and replay will also be available under the Investor Relations section of the BioScrip website at bioscrip.com.

Before we get started, I would like to remind everyone that any statements made on the call today or in our press release that express a belief, expectation or intent as well as those that are historical facts, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements are based on information available to BioScrip today and the company assumes no obligation to update statements as circumstances change.

These forward-looking statements may involve a number of risks and uncertainties, which may cause the company's results to differ materially from such statements. Forward-looking statements are subject to inherent risks and uncertainties surrounding future expectations generally and may differ materially from any actual future experience. Risks and uncertainties that could affect forward-looking statements include the failure to realize annualized cost savings associated with any restructuring or cost reduction efforts, the impact of members of management in executing these efforts, our ability to leverage core competencies or maximize margins and operating cash flows and the risks described from time to time in the company's report filed with the SEC, including the company's annual report on Form 10-K for the year ended December 31, 2010.

And now I would like to turn the call over to Rick Smith. Rick?

Richard Smith

Thank you, Lisa. Good morning, everyone, and thank you for joining today's call. 2010 was a year of challenges, as the business did not perform to our expectations. Despite the substantial success of the CHS acquisition, its integration and performance is part of BioScrip. In the balance of our business during the year, revenue margins were impacted by pricing concessions on various traditional mail drugs, reimbursement pressures in Pharmacy Services, the industry-wide AWP settlement and the overall impact of the weak economic environment.

As a result, we commenced a strategic assessment of our business line and our overhead structure to position BioScrip for the future. Importantly, we commenced a significant review of our corporate overhead as it is clear that we can be leaner. For the full year 2010, BioScrip generated $84 million of combined segments adjusted EBITDA. Diluting that cash flow is corporate overhead which amounted to $35 million during the year.

I would note that the 2010 results only reflect three quarters of CHS, which contribute approximately $10 million of segment adjusted EBITDA per quarter. While there are important corporate support services provided to the field operations, we believe there are significant opportunities to reduce our corporate overhead and this is one of our top priorities for 2011. As we previously stated on our update call in January, we've identified $15 million in annualized savings thus far.

We've already implemented the majority of the steps necessary to achieve these savings and we'll begin to see the benefits in Q1 2011. Approximately 50% of the savings has come from corporate headcount reductions with the remainder coming from changes in benefit plans that cover all employees. We fully anticipate reporting additional cost savings from these areas such as the consolidation of corporate offices, process improvements and the outsourcing of some of our transaction-based processing.

We're also focusing on completing many system upgrades that will allow us to retire legacy systems and eliminate related maintenance costs. I look forward to providing you with details as we continue to make progress.

Our biggest achievement in 2010, which won't show up in the numbers is the seamless completion of the CHS integration. This transaction enhanced our competitive position in Infusion services, giving us the foundation from which to expand our footprint nationally, and giving us access to a greater number of patients and a platform for future growth. CHS has been successful because we have been able to integrate the majority of the markets and gain entry to new ones, take advantage of the local community strengths, as well as access to the managed care relationships.

Today, BioScrip is a formidable competitor in the Infusion industry. We recognized that meeting the needs of our patients and delivering to them a high touch, quality service is vital to our business and we've sharpened our focus on the businesses that will deliver enhanced value to shareholders. This segment currently represents 25% of revenue, but we expect it to comprise a greater portion of BioScrip's overall business mix going forward. Last year, we implemented a new patient-driven model, which we refer to as our centers of excellence model aimed at improving patient adherence, compliance and retention. One of the benefits of the program is increased profitability and we are already seeing the pull-through benefit of this service model.

Additionally, our Pharmacy Services segment continues to grow sequentially, showing important increased growth in Oncology, MS and our Cash Card business. This segment has historically generated positive returns and continues to leverage its strong clinical reputation for growth. We have solid pharma relationships, access to specialty drugs, strong clinical capabilities and also added a new regional managed care contract, which commenced on October 1.

However, consistent with the strategic assessment, we are being more disciplined with our activities and pursuing opportunities that produce a strong return on investment. Thus far, we've identified $10 million to $15 million of fourth quarter low margin revenue on the Pharmacy Services side that we will not be pursuing going forward. We anticipate that this will have a positive impact on our gross margin.

As a result of the actions taken to date, we are entering 2011 with an enhanced focus and are better positioned for growth. We believe there are significant opportunities for our company to improve operating performance and cash flow generation. Our primary focus will be to drive profitable revenue growth in both the Infusion, Home Health and Pharmacy Services segments. We continue to remain committed to the management of the chronically ill and believe we have a clear path forward to rationalize cost structure, review revenue sources and business lines.

Lastly, we will not be providing guidance today as we believe it's premature at this time. As we talked about in January, we are working on key metrics to provide you with the transparency on the business, but there is more work to do and I anticipate many moving parts in the first half of this year. With that, I will turn the call over to MJ. MJ?

Mary Graves

Thank you, Rick, and good morning. For the fourth quarter 2010, we reported revenues of $450.4 million compared to $341.6 million for the same period a year ago, an increase of $108.8 million or 31.9%, primarily as a result of the CHS acquisition. Pharmacy Services revenue for the fourth quarter 2010 was $337.8 million compared to $300.9 million for the prior year, an increase of $36.8 million or 12.2%.

Infusion/Home Health Services revenue for the fourth quarter was $112.6 million compared to $40.6 million in the prior year, an increase of $72 million. CHS revenue contributed $69.4 million during the fourth quarter 2010. Excluding this CHS revenue, Infusion/Home Health Services revenue increased 6.3% or $2.6 million.

For the fourth quarter, gross profit was $72.6 million or 16.1% as a percentage of revenue compared to $41.9 million or 12.3% as a percentage of revenue in the prior year. The margin improvement was primarily the result of the CHS acquisition. On a sequential basis, consolidated gross margin decreased from 17.1% in Q3 to 16.1% in Q4, primarily due to the timing of certain vendor rebates, and new managed care contracts are expected to draw future patient volume.

SG&A for the quarter was $60 million compared to $37.6 million for the prior year. The increase in SG&A was primarily due to $20.2 million related to CHS, as well as an increase in brokers fees related to growth in our Prescription Discount, Cash Card business. Keep in mind that the Infusion/Home Health Services segment operates at a higher operating expense ratio to revenue than the Pharmacy Services segment due to higher labor costs associated with the delivery of patient care.

Total operating expenses for the quarter was $76.2 million compared to $42.6 million in the prior year. 2010 operating expense included surcharges ahead of cumulative impact of $9.2 million on the operating results for the quarter. These charges include a $3.9 million legal settlement related to the 2005 Northland acquisition, $3.5 million in restructuring expense, $1.3 million to fully reserve the remaining CAP receivables, and $0.5 million related to acquisition integration and severance expenses. As a result of these charges, the company's loss from operations increased from $0.7 million in the prior year to $3.6 million in the fourth quarter of 2010.

For the fourth quarter, interest expense was $8.1 million. In addition, fourth quarter non-operating expenses include a $9.6 million loss on the extinguishment of debt related to the term loan that was refinanced and converted into a $150 million revolving line of credit facility in December 2010. Additionally, the company took a $54 million non-cash charge to fully establish a reserve against our deferred tax asset.

Net loss for the fourth quarter was $67.1 million or $1.25 per share compared to net income of $40.7 million or $0.99 per diluted share in the prior year. During the fourth quarter of 2010, BioScrip generated $21.4 million of segment adjusted EBITDA or 4.7% of total revenue compared to $14.5 million or 4.2% of total revenue in the prior year. The Pharmacy Services segment generated $9.6 million of segment adjusted EBITDA or 2.8% of segment revenue. And the Infusion/Home Health segment generated $11.8 million of adjusted EBITDA or 10.4% of segment revenue.

On a consolidated basis, BioScrip reported adjusted EBITDA of $10 million or 2.2% of total revenue compared to $3.6 million or 1% of total revenue in the prior year. Consolidated adjusted EBITDA excludes the impact of the $9.2 million of charges I previously noted.

For the year ended December 31, 2010, we reported revenues of $1.6 billion, and a net loss of $69.1 million or a loss of $1.37 per share. This compares to revenues of $1.3 billion and net income of $54.1 million or $1.36 per diluted share for the full year 2009. Gross profit was $260.4 million compared to $157.8 million for 2009. As a percentage of revenue, gross profit increased to 15.9% in 2010 from 11.9% in 2009.

Operating profit was $15.8 million or 1% of total revenue compared to $15.5 million or 1.2% of revenue in fiscal 2009. 2010 operating profit reflects $10.6 million of price concessions granted in the prior year to a major customer and $17.7 million of charges related to acquisition, integration, and severance expenses, legal settlement expense, restructuring expense and the CAP bad debt expense.

2010 interest expense was $27.6 million. The company also incurred a $9.6 million loss on the extinguishment of debt related to the refinancing of the company's credit facility in December. Segment adjusted EBITDA was $84.2 million or 5.1% of total revenue. This compares to $56.4 million or 4.2% of total revenue for the prior year. Net of corporate costs, BioScrip reported adjusted EBITDA of $49.2 million or 3% of total revenue compared to $25.7 million or 1.9% of total revenue in the prior year. It should be noted that 2010 results only reflect CHS operating results beginning with the March 26, 2010, acquisition date.

Turning now to our cash flow. In 2010, net cash used in operating activities totaled $21.4 million compared to $22.7 million of cash generated by operating activities for 2009. This decrease in cash, provided by operating activities, was primarily the result of an increase in working capital requirements, as well as an increase in cash paid for interest on the senior secured facility and unsecured bonds.

Since year end, working capital requirements have been reduced by a $14 million reduction in inventory. As discussed, in late December, the company amended its credit facility to convert its $100 million term loan and $50 million revolver into a $150 million revolver. This amended facility provides us with better terms and financial flexibility, including greater borrowing power to support future cash flow priorities. We are in compliance will all of our debt covenants and our total draws under the facility have decreased from $81.4 million at year end to $53 million as of the end of business yesterday.

Now I will turn the call back over to Rick.

Richard Smith

Thanks, MJ. While 2010 was a challenging year, I believe we have taken the steps that will position BioScrip for the future. With the addition of CHS and our ongoing strategic assessment, I feel very confident that this company's headed in the right direction. We have a diverse business mix and are well positioned in the healthcare services sector.

We have significant resources, deep capabilities, and a strong commitment to our patients and the healthcare communities we serve. We recognize that consistent execution is required for this company to realize its full potential, something we plan to achieve. With that, I'd like to open the line for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Brooks O'Neil with Dougherty & Company.

Brooks O'Neil - Dougherty & Company LLC

I have a number of questions. I guess the first one I'd start off with is looking at the gross margin line, Rick and MJ. Is 16.1 a reasonable sort of run rate gross margin in your mind or are you thinking that with the changed business mix, you can return that to a higher level? And I guess corollary to that is are you seeing margin pressure in the Infusion/CHS side of the business or is it just in the more traditional specialty pharmacy parts?

Richard Smith

Yes, I think as MJ mentioned, there's opportunities in terms of rebates, in terms of more normalized throughout the year, so that clearly has a positive impact on margins. I think as we look at the business mix going forward, we would look to, again, optimize and increase our gross margins. And at the same time, Brooks, we did essentially roll out the Aetna contract, and so some of the blood products, some of the national pricing is lower than traditional home Infusion markets. But typically, we are seeing some significant stability and consistency across our traditional Infusion mix and margins as well. So there was, I think, as we look at forward to 2011, we anticipate that margins will definitely come up.

Brooks O'Neil - Dougherty & Company LLC

And you still see opportunity to significantly expand that traditional home Infusion, nutrition, therapy, antibiotics, et cetera, both by expanding into the stores, the specialty stores, as well as opening new locations and taking advantage of other opportunities?

Richard Smith

Yes. We are 100% focused from our Infusion sales force and our clinical team, our operations team to increase our market share on the traditional home Infusion therapies. We also, as we've talked about before, have opened up three new Infusion pharmacies attached to three of our community stores in the Midwest. And we will look to continue to take advantage of opportunities in other markets to also cost-effectively plant new flags for home Infusion capability.

Brooks O'Neil - Dougherty & Company LLC

And then moving down the line, it looked to me like relative to my model, G&A expense was $4 million, $5 million higher than I had expected. And I'm just curious to what extent some of the cost savings initiatives may not have been reflected in that and how quickly you think you could get that number down from $60 million to something hopefully a lot lower?

Richard Smith

None of the cost savings were reflected in Q4. You're correct. And the other thing that we had mentioned was there was an amendment to one of our cash card broker fees marketing arrangements that went into effect in November and that essentially resulted in about $2.5 million of debt increase. It was a necessary investment given the growth and the opportunities that we see, particularly with this one firm, as well as a couple of others that are driving significant growth in the Cash Card business. So we look to see that, that will essentially be absorbed in the second part of 2011 as the revenue continues to grow from our Cash Card business related to those marketing efforts. And that's essentially a bit more of an indirect variable selling expense.

Brooks O'Neil - Dougherty & Company LLC

And then I'm just curious if MJ or you could give us any feel for where you stand relative to your covenants, both at year end and kind of as you start looking into 2011? Do you feel like you have a lot of room or are we walking the precedence this year?

Mary Graves

I will answer that for you, Brooks, but actually, before I do, I wanted to give a little bit of follow up to your last question and Rick's response. I just wanted to add that the interesting thing about Q4, to keep in perspective, is we made so much investment in Q4 in different areas of the company where the cost of all of that effort went into Q4 but all the benefits are going to start to be seen in the first quarter and second quarter this next year. I mean these are all from the debt refinancing, we had $9.6 million of costs related to the extinguishment of that debt, the restructuring costs, all the cost related to the valuation of the plans to get those ready to put in place. And then the Cash Card, brokerage fees like Rick mentioned, that's a very high gross component of the business right now. We're very excited about it. So Q4 isn't a big investment quarter. But we're excited about the outlook for 2011. Moving into 2011 in the debt covenants just to let you know, under the new credit facility, you've probably seen, we have three key covenants. They includes the minimum liquidity, the AR turnover and the fixed charge coverage and for all these, we're in compliance at the end of the year, we're in compliance today. We have plenty of room under those so we feel comfortable about continuing to be able to meet those covenants.

Brooks O'Neil - Dougherty & Company LLC

Just one or two more quick ones. As you look at the mix of business that you have now, should we anticipate the sale or absolute close of any significant part of the company at this time?

Richard Smith

No, essentially, we've got the business and our focus, as we said and as I said in my remarks, we've got good strength on the Pharmacy Services side. We've got good strength on the Infusion/Home Health side, they continue to grow. Both segments generate significant amount of cash flow and segment EBITDA. We've got some good opportunities, we believe, they're operating more efficiently and also the same time, ensure that we are dropping more of that cash to the bottom line and improve cash flow generation and operating cash flow contributions as well.

Brooks O'Neil - Dougherty & Company LLC

And then the last question I have is just related to the reserve for the taxes. How will that impact financial statements for 2011? I remember talking with Stan Rosenbaum a lot about naked credits and whatnot, and I'm just, want to make sure I have a good sense for how we should view the tax line for this year.

Mary Graves

Actually, it puts us in a very plain position going forward as you can imagine, Brooks, unfortunately, tax rules both on the federal income tax reporting side of things as well as for book purposes. They don't always follow practical realities, unfortunately. We all know this, especially if we were to prepare our own personal tax returns coming up in April. The rules that apply to the NOLs and the deferred taxes in this situation, they are very black and white. They do not allow very much room for judgment at all. There are not very many subjective factors in this consideration. So unfortunately, we had to go ahead and establish the tax allowance reserve this year primarily because of the fact that even though we have brought in the valuation allowance last year as income, this year, we had to put it, write it off all over again, and the reason was primarily because you look at the NOL and the recovery period, we had to measure that, in 2010, we had additional tax losses primarily because of the unexpected acquisition costs, transaction cost related to CHS and then the restructuring costs. It's really that NOL in that recovery period that drives that. We're not concerned about it. It has nothing to do with goodwill or an impairment of goodwill, a completely separate measurement. What we're going to see going forward is an extremely low effective tax rate going through for book purposes.

Operator

Our next question is coming from the line of Mike Petusky with Noble Research.

Michael Petusky - Noble Financial Group, Inc.

Actually, I'm not sure I completely follow that last piece of that explanation. So what's a good tax rate going forward if we're modeling this in '11?

Mary Graves

Probably 11% to 12%. And the big piece of that, the driver's really the state taxes.

Michael Petusky - Noble Financial Group, Inc.

And that would essentially match up with cash taxes as well?

Mary Graves

Yes, because it's primarily the state.

Michael Petusky - Noble Financial Group, Inc.

And I guess I want to talk about gross margin and some of the factors that you guys had cited on the third quarter conference call. Rick, could you just talk about the thing that I remember, IVIG product allocation issue, you had a decrease in heart failure therapy due to the new ventricle assist device. You had some out of network, in network transition on the Aetna contract. Can you just talk about what you're seeing there? How much of that kind of continues to deteriorate and just speak to that?

Richard Smith

Actually, a part of there's -- the Q3, Q4, what impacted us a little bit if you also remember there was a recall of Octagam back to pharma in Q3, late Q3. Some of that revenue essentially, so the product was returned so we had to reverse the revenue in Q4, so it was about $1.1 million impact on the IVIG side there. We did see that the product that we had mentioned that was put on allocation in Q3 became more available in Q4. So that leaves a mitigation of that Q3 impact into Q4. And so we saw some positive direction there as well. And as part of our focus on traditional therapy, we have put significant amount of training and focus on widening the markets in which we essentially offer that therapy. And as we mentioned on the call, there are essentially many potential customers or patients that still essentially qualify for the drug therapy in that regimen. So our program actually has stabilized in Q4 and we expect that we'll see some growth in 2011.

Michael Petusky - Noble Financial Group, Inc.

So are you saying that, that new bad that's not continuing to have an impact there, is that essentially what you're saying?

Richard Smith

We thought initially, but I think that we're hearing noise, the people that cover the manufactures at some of those centers may not make money at the reimbursement side. But we've always known or we've always believed that clearly, even with the application of that technology, there are always will be candidates for the services that we provide. And so I think our focus is to continue to drive our center of excellence models in the areas that we talked about in all of our locations. And so if we focus on being experts in the areas or one of the experts in all of our markets then the opportunity to drive strong organic growth given our managed care contract access in all of our markets, will enhance our opportunities for margin improvement, revenue growth and EBITDA contribution.

Michael Petusky - Noble Financial Group, Inc.

And then the out of network going to in-network, is that kind of run its course or are you still in kind of in the midst of that?

Richard Smith

We saw that in Q4 as Aetna went live but I think that the traditional margins under the national agreements are consistent with other regional, local managed care players. I think that given our large concentration in the blood product space, when you bring other branches into those contracts pricing, you have that effect. And so we did see some of that in Q4 and we expect that we have run our course.

Michael Petusky - Noble Financial Group, Inc.

And then jumping back to the $15 million on annual savings you've identified, is that about it or is that as much as you can find in terms of the strategic review?

Richard Smith

I think -- no, as we said in January, we expect to find more and I think that, as I mentioned, there are some areas that we've been looking at and it continues. It's a top priority for us. I believe there's as much as another $5 million that we can get after towards the second half of the year. And so our goal is to identify the most effective way to continue to be more efficient in terms of a leaner corporate structure. So the benefits of the cash flow generated, the field level drops into our bank account.

Michael Petusky - Noble Financial Group, Inc.

And you, I believe, said that you had implemented the majority of the initiatives around the $15 million. So I would assume that, that really actually should start to hit in a material way in the first quarter and certainly the first half. Is that fair to say?

Richard Smith

You'll see some impact to that. You'll see that in some portion of that in Q1, as some of it took effect in this quarter and then you'll see a fuller benefit of that in Q2 and subsequent quarters.

Michael Petusky - Noble Financial Group, Inc.

Just around these two areas that I'm asking about. Is it fair to say that gross margin of 16.1%, 16.2% should be the low watermark for the next few quarters and that, essentially that $60 million of SG&A should be the high watermark relative to the next few quarters? Is that a fair way to think about this?

Mary Graves

I think that's fair. We had to be able to [indiscernible] because we've said that we're not going to provide guidance and Rick will actually hit me if I start providing guidance when he said we're not going to provide guidance. From where we sit today in evaluating everything, I would say that's fair. Of course, that always depends on a number of things but based on where we are as a business, I think that's reasonable.

Richard Smith

The one thing, Mike, too, is on -- the SG&A will essentially, clearly, the cost reductions will come out of there. At the same time, though, the SG&A, the increase in brokerage costs will be reflected in the SG&A, so that is more of a selling expense. It does go up which we anticipate it will, it'll be related to increased revenue, which is nice good volume for us.

Michael Petusky - Noble Financial Group, Inc.

You said $10 million to $15 million of low margin revenue that you'd be dumping. Does most of that start or did it start at January 1? Does that kind of slowly go away over time?

Richard Smith

Essentially, mid this quarter.

Michael Petusky - Noble Financial Group, Inc.

And do you think that's about all you can identify? I actually expect it when you went in with contracts, it might be more than that. Is that about it or do you think there's more?

Richard Smith

As I said, we still have more work to do and we are being very deliberate in terms of that work and analysis. And so we anticipate that we'll find some other opportunities during the first half of this year, as well as to essentially continue to identify areas where we apply our resources and our focus for growth.

Operator

And our next question coming from the line of Wayne Anglace with Delaware Investments.

Wayne Anglace

Did I hear correctly that the outstanding balance on the revolver is now down to $53 million down from the $81 million that it was at year end?

Richard Smith

Yes.

Mary Graves

Yes, that is correct.

Wayne Anglace

Could you just explain to me because it looks to me like you finished the year with not a lot of cash in the balance sheet, and I'm just trying to figure out where the $28 million discrepancy is coming from?

Mary Graves

Where that came from?

Wayne Anglace

Yes.

Mary Graves

One thing to keep in mind, Wayne, is that under the terms of the new revolver, we're going to have zero cash on the balance sheet moving forward because the way that revolver works is cash is supplied to it every day. So the revolver balance will move every single day based on working capital needs. It does go up and down quite a bit, from week-to-week. And lot of that depends on the timing of our very large payments to our drug wholesaler. So if you look at it a certain point in time, it might pop back up in $20 million or $30 million and then it comes back down again. But still on an average, it's dropped from the $80 million to $60 million and below and right now it's at $53 million. One of the big factors like I've mentioned is that our inventory balances have come down by about $14.2 million as of last week. The other thing we're putting a lot of focus on accounts receivable. So the combination really of focusing on those two areas alone have had a significant impact on the borrowings needs of the company.

Wayne Anglace

In essence, it's the working cap movement that's going to fluctuate, and it could be anywhere $30 million quarter-to-quarter?

Mary Graves

Yes, it's kind of blow away but the average is clearly down to below the $60 million level. So even though we're at $53 million today, I would tell you that it's kind of an lower point but the average has been around $60 million. So we clearly improved it by about $20 million.

Richard Smith

And Wayne, this is going to this facility and asset based, it really provided us a more effective use of our cash, those on the balance sheet in the short period given that we were able to also negotiate a lower interest rate on this facility and the ability to take excess cash and pay down the debt save the interest costs and then reborrow, when we needed to pay our wholesaler, was the large driver of going back to this type of structure for the company.

Wayne Anglace

Do the covenants allow for the debt extinguishment that you incurred in the fourth quarter to be added back to EBITDA?

Mary Graves

Yes, I believe so. I'm trying to recall the specific basket, but I think so.

Wayne Anglace

And then my last question would be it, seems like bad debt's been creeping up over the course of 2010. Could you just give us a little bit of color around what's causing that? And then what you think your expectation is around 2011? I know you don't welcome the thing of guidance but...

Mary Graves

Sure. As far as bad debt expense, when you're looking at it on the face of the income statement, do keep in mind that bad debt includes the charge that we took to fully reserve the CAP bad debt and that alone was about $1.3 million. We did take a very hard look at the receivables, including the bad debt reserves and contractual reserves at the end of the year, looked at the trends, but there is a lot of hard work done through the year to make sure that the accounts are in good order. Rodney Wright, who leads at one of the business is doing a great job. He's been with the company for over 14 months now. He firmly has his hands around all sides of the business. So I don't feel like we have any surprises lurking at all. He's done a great job. We're just making sure that everything's cleaned up and well reserved. The funny thing is, I mean, when you look at what the company achieved in 2010 with the full integration of CHS, the integration went so well that you're not hearing about it. I mean, that's the wonderful thing and if you look at the success in terms of just DSO alone, the DSO for the company was 45 days in March of last year, and in December, a 45.5. So I think we're in really good shape going forward. Rick and I both have talked to Rodney about what he sees. I've gone through the detailed analysis performed by the finance team on the reserve need. We fine tuned our reserve methodology this year to be a little bit more conservative, but it's really just taking into effect kind of a window look as far as the minimum and maximum need. So I think we're in very good shape.

Wayne Anglace

So that maybe third quarter 2010 was probably more indicative of what we can expect on a go-forward basis, is that fair to say?

Mary Graves

I would recommend possibly looking back because of the fact you've got that CAP charge in the fourth quarter. Like I said, that debt would not represent our run rate expectation.

Operator

Our next question is coming from the line of Glenn Garmont with ThinkEquity.

Glenn Garmont - ThinkEquity LLC

Just a couple of quick ones here, and I'm sorry if I missed this, but the sequential decline in the Infusion/Home Health EBITDA, what was that attributed to again?

Mary Graves

Well, there were a couple of things on a sequential basis. The key thing to focus on really is debt. We had a conversion of some of the out-of-network contracts to the in-network contracts and that conversion did have an impact on the gross margins for the business. But at the same time, we are expecting, this is national contract, will have a big impact on patient volumes going forward. So that was one of the biggest things that was affecting Infusion itself. Another thing that impacted it was rebates from our vendors. In a way some of our most material vendor contracts work, there's actually a measurement that has to be achieved and it's a yes, no. You meet it or you don't meet it type measurement, and that measurement occurs in the third quarter of the year. So it's not an accrual that we can actually just say we anticipate x and accrue 1/12 each month. We really do have to wait until we hit that benchmark before it can be accrued. So we saw a benefit of that in Q3, but we don't have that benefit in Q4, so that affected the margins as well. There's a little bit of impact in that 16.1% blended that does have to do with just the mix of the business in fourth quarter. We did have a delay onset of the flu season and on top of that, Antibiotics were a little bit weak in the fourth quarter but we're seeing that come back around.

Glenn Garmont - ThinkEquity LLC

And MJ, did you quantify or could you remind us if you did what the rebate was in 3Q?

Mary Graves

The rebate impact from Q3 to Q4 was $3.1 million decrease. And that's pure timing, Glenn. That does not have to do with the rebate that's gone away. It's just kind the timing in direct.

Glenn Garmont - ThinkEquity LLC

And then how much of your revenue is drug card revenue at this point?

Richard Smith

It's a small percentage.

Glenn Garmont - ThinkEquity LLC

But it sounds like you're incrementally more excited about that opportunity. I mean, why is that? What's the opportunity there exactly?

Richard Smith

I guess on that, we're not incrementally excited. I think it's been an area of the business that grows. It has been growing as a result of the uninsured and the fact that more marketing organization utilize our PBM network, our Pharmacy Network, to essentially put cards out there. And it's been one of the factors of increase in our SG&A. And so we talk it about just -- and I think some of the key metrics that are putting together is really to provide more information in the future around the different areas of the business. But it's primarily the fact that, that it is an increased level of our SG&A that we talked about and with this one amendment, the increase in the brokerage fees in Q4 that will be mitigated and absorbed as the growth in that revenue occurs in future period.

Glenn Garmont - ThinkEquity LLC

And then shifting topics, Rick, how many of your pharmacies are equipped for Infusion at this point?

Richard Smith

We've got about 51 of our total. So about 45 owned and then another six in the different stores.

Glenn Garmont - ThinkEquity LLC

Six in the ...

Richard Smith

In the community member, some of our community stores.

Glenn Garmont - ThinkEquity LLC

So those kind of the legacy BioScrip community stores, right?

Richard Smith

Correct.

Glenn Garmont - ThinkEquity LLC

And there's opportunity there for incremental Infusion suites in additional locations?

Richard Smith

Subject to the market location, yes. So we just added three where it made sense and we could cost effectively put some assets in there to access the acute Infusion patients off of our managed care agreements in those markets and leveraging off to the clinical strength and reputation of those local stores as well. And that we'll continue to look at as the markets we've identified to expand into in 2011, whether or not it makes sense for us to leverage a community store or plant a flag brand new in a specific community.

Glenn Garmont - ThinkEquity LLC

And then my last question, again, getting back to the $10 million to $15 million of lower margin revenue that you won't be pursuing here in 2011. Is that specific customers? Is it therapies? Any more detail there would be helpful.

Richard Smith

No, primarily, it's different therapies, but it's just something that based on the structure of it, it really didn't make sense for us to spend our time in that area. And so it's really -- it takes activities away from one area that was not that productive and we can redirect those into other areas with higher margin contribution opportunity.

Operator

[Operator Instructions] Our next question is a follow-up question, it's coming from the line of Mike Petusky with Noble Research.

Michael Petusky - Noble Financial Group, Inc.

Just a handful more. Can you comment on now you're, I guess, five months into the Aetna of the new Aetna contract and how is that ramping? Kind of in line with initial expectations behind, ahead? Can you just speak to that?

Richard Smith

My view, we're never are at the level of performance that we should be. And so I think that there's more fuller [ph] opportunities. We've increased our focus, as I mentioned, in terms of all of our markets and all of our traditional programs. But I think that we -- and we don't typically speak to accounts, but I think -- our objective is we can definitely grow growth at a faster clip and be able to take market share given this license to hunt on a national, local level.

Michael Petusky - Noble Financial Group, Inc.

And then also, I want to ask about I know a piece of business that has lagged is drugstore.com. Can you speak to if success picked up at all? What was the revenue on drugstore.com? I think you actually disclosed that in the third quarter. What was revenue in fourth?

Richard Smith

It didn't materially bumped up as much. It's a good business. The profitability is still falling through as expected on the margin, and we expect it, I think, just a delay in closing that deal essentially to pick up some momentum out of the level we expected to get on the ramp. But we are working with them on marketing programs in leveraging different programs we have and they have to essentially build the revenue up. But it clearly was essentially flat per month with the Q3 level.

Michael Petusky - Noble Financial Group, Inc.

So around $3.5 million thereabouts for the quarter?

Richard Smith

Yes, a little bit more than that, just under $6 million.

Mary Graves

It actually grew $1.8 million for the quarter.

Michael Petusky - Noble Financial Group, Inc.

And then on the CHS, you guys talked about possibly uncovering some revenues, synergies there between legacy BioScrip and CHS. Can you speak to that? Are you finding any ways for you guys to work together?

Richard Smith

As we had mentioned, a part of the revenue synergies was, really, the opportunities in terms of patients that we were turning down prior to the acquisition that they had contracts on and we are able to take advantage of those during the year and essentially we were able to essentially drive more patients centers through their platform and their payers that would get referred in from some of our market. We also has seen that their local sales force has taken advantage of our expertise on the transplant side in [indiscernible] and so there's been some opportunities that we have seen the CHS people reach out to our specialty side to generate a more combined service offerings to patients in their communities.

Michael Petusky - Noble Financial Group, Inc.

Is there any way to quantify any of that? I mean is that worth a couple of million dollars, less than that, more?

Richard Smith

It's a little bit more than that during the year in terms of the contribution. So it was nice organic opportunity and so I think we'll see more opportunities for us to continue to take advantage of their locations, their relationships. We've seen a number of their branches offer our specialty side, some oncology relationships that have turned into some revenue and so I think we'll see further opportunities in 2011 to continue to take advantage of relationships on both sides of the company.

Michael Petusky - Noble Financial Group, Inc.

A couple more, real quick. You mentioned headcount reduction. Is there much severance likely to be associated with that in Q1 or Q2?

Richard Smith

There will be some tail yet of it, but we haven't quantified the full effect yet.

Michael Petusky - Noble Financial Group, Inc.

It will be less than this quarter, hopefully?

Richard Smith

I think approximately, we'll have to take a look at the full amount.

Michael Petusky - Noble Financial Group, Inc.

And then just last question. You guys had some litigation from way back went break against you here recently. Can you just speak to -- are any there any other rats in the woodpile in terms of old deals gone bad or anything lurking out there or can you speak to that?

Richard Smith

I think that there's two on the CHS side that we don't believe have any merit as we disclosed in our prior filings and so, but those I think are primarily the ones that we have disclosed, that we're aware of.

Michael Petusky - Noble Financial Group, Inc.

What's the financial risk associated with those?

Mary Graves

Actually, we have indemnification I know on one of them maybe even both. But I know one for sure we do. So it's not something that we've been concerned about from the standpoint of having a probable loss. The insurance covers the second one. The first one is covered by indemnification from the sellers and it's covered by escrow.

Operator

Mr. Smith, there are no further questions at this time. I will now turn the call over back to you.

Richard Smith

Thank you, operator, and thank you, everyone, for your time today. As we said before, we have a diverse business mix and we believe we're well positioned to grow this company. We continue to tap our significant resources, our deep capabilities and leverage that strong commitment to our patients and health care communities that we serve. So we believe that we have taken the necessary steps so far. We'll continue to take the necessary steps to improve the profitability, the revenue generation and the cash flow generation of this company. And we'll talk to you on the next call. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.

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